Analysis of the impact of size on MIT thresholds

203. From a methodological point of view, the MIT MSC benchmarks are obtained in several steps. First, for each merchant the MIT MSC level for debit (credit) card is defined as the difference between the marginal costs of cash and debit (credit) card.

= − _, + − _,

where i identifies a merchant, j identifies the debit or credit cards, , _, , and

, are calculated using the cost data as well as the information on the nature of different cost items⁹⁴ reported by the surveyed merchants and X is the value of the transaction.

204. Second, those MIT MSC levels are expressed as a percentage of the chosen transaction value according to the following formula:

(%) = − _,

+ − _,

205. The chosen transaction value X is in line with the respective approach: the average card transaction value in 2012 as per the ECB statistics (EUR 49 for debit cards, EUR 73 for credit cards) for the card-based approach, and the average retail transaction value observed in the sample (EUR 25) in the retail-based approach.

206. In a third step, the median MIT MSCs are calculated for 20 different classes of merchants, defined by their country (10 countries) and their size category. They are identified as below, where identifies the debit or credit cards, the size category and the country. Again, the choice of a median rather than a mean aims at limiting the influence of extreme values, either very high or very low, that can have a non-negligible impact on average calculations because of the relatively limited number of observations in each size category.

207. In the fourth and final step, the median MIT MSCs of the different merchant categories are aggregated across countries, separately for size 8 and size 6-7 categories, in order

94 As regards the analysis of marginal costs, the results are presented for the medium-term approach only (Scenario 2). The size effect on costs is similar under the short-term approach.

65 to obtain benchmarks of MIT MSCs for debit and credit card at European level.

Weighted averages are used:

= ∑ . , = 6 − 7,8

208. For both the card and retail-based approaches, some assumptions had to be made in order to define the weights reflecting the relative importance of each merchant category (defined by country and size).

209. In the retail-based approach, the relative importance of a merchant category is defined by the share of the total value of cash and card transactions that category represents. Because of the lack of information on cash transactions, the total turnover will be used as a proxy for the total value of cash and card transactions. The Eurostat statistics indicate the turnover distribution across countries for different sectors. In particular, that information is available for the four sectors represented in the sample (G.47, G.45.2, I.55 and I.56). However the split of the country sector turnover across size categories is available only for sector G.47 (retail trade) which nonetheless represents more than 80% of the total turnover of the four sectors represented in the sample. The distribution across size categories and countries of the G.47 turnover will be used as a proxy for the distribution across size categories and countries of the turnover of the three other sectors. The formula for in the retail-based approach is then :

= ( . 47)

210. Regarding the card-based approach, the relative importance of a merchant category is estimated by the card turnover that this category accounts for. The ECB publishes the total value of card transactions by country with a further split between debit and credit card transactions. Nevertheless the ECB statistics do not present the distribution of this country card turnover across size categories. In order to compute marginal costs benchmarks and MIT MSC and MIF figures in the card-based approach, a proxy of the card turnover per merchant category should be defined. This is done here by assuming that the proportion that debit (or credit) card transactions account for in the total turnover is identical for all size categories in a given country. This proportion is then equal, in a given country, to the ratio between the debit (or credit) card turnover reported in the ECB statistics and the total turnover coming from Eurostat. Therefore the debit (credit) card turnover proxy of one merchant category is the product of the proportion of debit (credit) card transactions – in value – of the country and the total turnover of this merchant category coming from Eurostat statistics. The formula for

in the card-based approach is then:

=( ( ) )

( ) ∗ ( . 47)

211. The tables below show the weights used in both the retail and card-based approaches:

66

Table 10: Weights in the retail-based approach

Country 6-7 8

AUSTRIA 8514.9 23727.3

BELGIUM 12203 29329.8

FRANCE 86558.5 161509.3 GERMANY 71296.6 217761.4

ITALY 34100.6 78675.8

NETHERLANDS 17386.6 38201.1

POLAND 13249.3 33864.2

SPAIN 21110.1 82030.3

SWEDEN 15254.6 25908.2

UK 36832.4 265284.1

Total 316506.6 956291.5

Table 11: Weights in the card-based approach

Country Debit cards Credit cards

6-7 8 6-7 8

AUSTRIA 1982.927 5525.551 1386.503 3863.576

BELGIUM 6312.112 15171.1 1534.798 3688.873

FRANCE 65461.65 122144.7 2191.834 4089.739

GERMANY 17328.87 52927.6 6230.355 19029.39

ITALY 6270.212 14466.43 4791.689 11055.23

NETHERLANDS 12047.22 26469.65 1551.613 3409.137

POLAND 2567.282 6561.777 843.0782 2154.844

SPAIN 3376.528 13120.62 4514.264 17541.67

SWEDEN 10579.72 17968.44 6788.384 11529.3

UK 32387.19 233267.6 13980.48 100693.9

Total 158313.7 507623.6 43813 177055.7

212. The tables below show the median indifference threshold for the merchant service charge in both the card-based and retail-based approach⁹⁵.

95 For the sake of simplicity, the size specific results are included only under the medium-term approach to cost nature (Scenario 2). Also, the exclusion of the 8 merchants belonging to sizes 4 and 5 would lead to slightly lower MIT MSC benchmarks for size 6-7 category, the impact of the exclusion being always lower than 0.06%.

67 Table 12a: MIT MSC for debit cards in the card-based approach by size category (transaction value EUR 49) – medium-term (Scenario 2)

Table 12b: MIT MSC for credit cards in the card-based approach by size category (transaction value EUR 73) – medium-term (Scenario 2)

Table 13: MIT MSCs in the retail-based approach by size category (transaction value EUR 25) – medium-term (Scenario 2)

213. From the above MIT MSC benchmarks and taking into account the benchmark acquiring margin for large merchants (6 bps), one can calculate MIT MIF benchmarks for both size categories separately. However, since it is likely that the acquiring margin is lower for merchants belonging to size 8 than for merchants of size 6-7, by using the same benchmark of acquiring margin for both size categories, the scale effects between the MIT MIFs of size 6-7 and size 8 would be overestimated.

214. The results suggest that the indifference thresholds for the merchant service charge would decrease with the merchant size for large merchants with a turnover above EUR 20 million, which is consistent with higher economies of scale for cash than for cards.

5.4.1.3 Calculation of MIT MSC and MIT MIF for all large merchants